The ACFE's Code of Professional Ethics

The ACFE's Code of Professional Ethics

On the CFE Exam there are a few questions about the ACFE Code of Professional Ethics. The good news is that most of these questions are very straightforward and shouldn’t give you any trouble. Things like “don’t violate the law” or “don’t engage in conflicts of interest” are pretty self-explanatory. But there are two areas that I have found sometimes cause people a little confusion.

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Integrity Is More Than a Robust Code of Conduct

Integrity Is More Than a Robust Code of Conduct

We all know this well-worn concept: An organization’s reputation takes years to develop, but it can collapse overnight if it didn’t originally possess integrity from the top down. “It took 160 years for Siemens to build a reputation and only five minutes to ruin it,” said Dr. Andreas Pohlmann, the former chief compliance officer of Siemens, at the 29th Annual ACFE Global Fraud Conference in June. A little ill-gotten profit means nothing if a business has to close its bank accounts when it goes belly up.

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Volkswagen Exec Arrested: Dissecting the Fraud Triangle

AUTHOR'S POST

Mandy Moody, CFE
ACFE Content Manager

Steve Morang, CFE, CIA, CRMA, Senior Manager at Frank Rimerman & Co LLP, began his session at the ACFE Global Fraud Conference last June asking attendees to raise their hands if they believed the Volkswagen executives didn’t know anything about the fraudulent emissions tests built into more than 11 million of their diesel cars. Only one person raised his hand. That one person may have a hard time defending himself today since the FBI arrested a Volkswagen executive (a compliance head) on conspiracy charges.

No matter if you think the executives did know about the manipulation or not, there are lessons to be learned from dissecting what could have possibly led to an ethics failure that cost $35 billion in market capital in just five days.

One way to analyze the scandal is to place it into the Fraud Triangle. Identifying the pressures, rationalizations and opportunities, as Morang did, shines a light on the dark areas that plague many companies' ethical cultures.

Pressure
According to Morang, the former CEO’s management style was ruthless. Martin Winterkorn wanted the German car giant to be the No. 1 car maker in the world and that meant making it into the U.S. marketplace with their diesel engine cars. The tone at the top was to get it done and get it done now.

In a 2015 CNBC article, Bernd Osterloh, a supervisory board member for Volkswagen, was quoted as writing in a letter to staff, "We need in future a climate in which problems aren't hidden but can be openly communicated to superiors. We need a culture in which it's possible and permissible to argue with your superior about the best way to go."

The article goes on to reference former company executives describing “a management style under Winterkorn that fostered a climate of fear, an authoritarianism that went unchecked partly due to a company structure unique in the German motor industry.” Upon Winterkorn’s resignation in September of 2015, he said that he was “not aware of any wrongdoing.”

Rationalization
To the people responsible for the manipulation of the engines, Morang said the tampering was done for what the employees under pressure thought was the greater good. They were using the same utilitarian ethics that I described in a previous post. There was a mentality that it was okay to bend the rules so that Volkswagen, and the investors, could come out ahead. In other words, the ends (larger profits, notoriety and reputation) justified the means (fraudulent emissions tests).

Opportunity
When an employee or group of employees (the investigation is still ongoing) discovered that the diesel cars could be wired to cheat emissions tests, the legs of the Fraud Triangle moved quickly into place. By adding the pressure to enter the U.S. market with the rationalization of putting the company above all else, in addition to the opportunity to fool emissions tests, the slippery slope soon looked like an easy path to take.

By understanding the pressures, rationalizations and opportunities that contributed to the actions taken either by a few or many, the top, middle or the bottom, anti-fraud professionals can take away practical tools to use when examining their own company’s ethical culture.

Exit Interviews: An Overlooked Tool in the Anti-Fraud Toolbox

GUEST BLOGGER

Andi McNeal, CFE, CPA
ACFE Director of Research

Julia, an accounts payable clerk, gave her manager two weeks’ notice that she was leaving to take a new job. On the surface, there was no dramatic “I quit” moment or signs that Julia was leaving on anything other than a positive note. During her exit interview, an HR representative had Julia sign some forms, went over the termination of her benefits and asked Julia a few cursory questions. When questioned about her reasons for leaving, Julia stated that she’d been offered a position at another company that paid more — which was true. But what Julia didn’t reveal — simply because she was never asked — is that the reason she began looking for another job was that she was deeply disturbed by a pattern of dishonest behavior displayed by the company’s controller. As she left the organization, so did management’s chance to glean, and act on, the information Julia held. Instead, the company’s controller was able to continue his dishonesty undetected — to the tune of embezzling more than $275,000 from the organization.

Many organizations conduct exit interviews as a matter of company policy. Far fewer use these interviews as a formal element of their anti-fraud programs, leaving them vulnerable to missing candid and crucial information about ethical issues and blind spots, and even the warning signs of potential or existing fraud. Like employee surveys and a reporting hotline, exit interviews provide an opportunity for employees to give (sometimes brutally honest) feedback as they are departing the company. And management should want that feedback — especially from individuals who have seen what the company has to offer and choose to move on.

Although the perceived risk of retaliation should be diminished for employees who are leaving, some individuals might have concerns about negative professional references for future jobs or other forms of retribution. Consequently, the exit interview should be conducted in a way that makes clear the value management places on hearing what the exiting employee has to say. Rather than the employee’s supervisor, the party conducting the exit interview should generally be someone from the HR department or ethics team; some organizations even outsource exit interviews to a third-party provider to add a layer of independence and foster the individual’s comfort in the process.

During exit interviews, the interviewer should ask departing employees questions like:

  • Why are you leaving the company?
  • Why did you begin looking for another job (if applicable)?
  • Did you feel you were adequately trained and equipped to do your job well?
  • Did you receive adequate training regarding the company’s compliance, ethics and anti-fraud policies?
  • How would you describe the organization’s culture?
  • Did your coworkers, supervisors and management adhere to the company’s compliance, ethics and anti-fraud policies?
  • Did you know how to report concerns about fraud, dishonesty or other misconduct?
  • Were you comfortable talking to your direct supervisor about ethical concerns or issues?
  • Do you have any unresolved ethical concerns or issues related to the position you are leaving?
  • Do you have knowledge about any unresolved ethical issues in general?
  • Do you have knowledge of any potential fraud that occurred during your time with the company?

If someone seems reluctant to provide information or if the interviewer suspects the individual is holding back, a different line of questioning — such as “Would you recommend this company to a friend as a place to work?” or “If you could change anything about your position here or the company overall, what would it be?” — might help reframe the conversation and open the lines of communication. The interviewer should also follow up on any responses that indicate potential ethical issues or signs that the individual has knowledge of misconduct with additional questions. Additionally, the interviewer should be trained in what to do with the information provided by the exiting employee, including when and to whom to escalate any issues noted for further investigation.

And yes, disgruntled employees might use an exit interview to complain about personal issues or grumble about specific coworkers. But those same employees might be dissatisfied because their legitimate concerns were overlooked during their employment. Much like the tips received through a helpline, it’s better to have employees providing their honest thoughts — even if management has to sort through them to find the real red flags to follow — than to have employees keep quiet and not have the flags waved at all. And disgruntled employees can be a source of valuable insight into issues of organizational or department culture that should be noted and potentially explored.

When conducted effectively, exit interviews can provide management with a wealth of knowledge to help assess the culture of specific departments and the organization as a whole, as well as to uncover issues that might otherwise have been missed. If only Julia’s employer had known to use her exit interview for this purpose, the company might have been able to uncover the controller’s scheme much sooner.

Indifference to Ethical Business Conduct is Death for Organizations

FROM THE PRESIDENT

James D. Ratley, CFE
ACFE President

In my decades of anti-fraud work I've learned more things than I've taught. Here's one important nugget: Organizations should encourage whistleblowers. (At the ACFE, we like to call them sentinels.) As in years past, the 2016 Report to the Nations says the most common detection method still is tips.

In Fraud Magazine's latest cover article, Top 10 factors leading to hotline distrust: Understanding why no one calls, authors Ryan Hubbs and Julia Kniesche write that whistleblowers have always been subject to false allegations, retribution from management and even dismissal.

I've met few whistleblowers who weren't targets of their organizations after they bravely stepped up to the plate. (Just read the stories of Tony Menendez and James Holzrichter.)

Hubbs and Kniesche write that employees often ignore company hotlines because they witness top management's indifference to ethical business conduct. "When employees see management retaliating against would-be whistleblowers, the message at the operational level is clear: Mind your own business, don't ask questions and keep your head down if you want to keep your job," they write.

That attitude is death for organizations. "An ethics hotline reporting system becomes meaningless when employees can't trust that local management will take appropriate action," say the authors.

Some of the factors that lead to ineffective hotlines, they share, include neglecting to train hotline workers well; management that interferes; employees who don't understand the systems; inadequate resources and poor program designs; and retaliation against whistleblowers.

Sometimes, organizations begrudgingly begin hotlines because of stipulations in the U.S. Sarbanes-Oxley Act and the Dodd-Frank Act, or European Union directives.

However, the organizations that see the best hotline results initiate them because they know they'll encourage strong internal cultures and revive flagging morale. As the authors write, employees' lack of trust in the reporting process can create unhealthy work environments, and eventually result in employment lawsuits, legal and regulatory actions, loss of assets, external whistleblower complaints, poor customer perception or brand reputation, and high employee-turnover costs.

Hubbs and Kniesche write that most employees want to do the right thing, and organizations need to do what they can to help support and encourage employees to report. "Failures in employee reporting today can result in significant operational and reputational hurdles tomorrow," they explain. They encourage you to follow their tips to strengthen your reporting program so no top executive ever has to ask the question, "What went wrong?"